Random Rantings and Market Ideas

So my sister got me one of those Easybuttons from Staples and I decided that I would give it a try this weekend. I decided that I was not going to do much, I'd rely on that Easybutton instead, and I'm sad to report nothing got done. Begads! Foiled again in my attempts to make something from while putting in nothing.

I wish there was an easy button, in the stock market and in life- but there just is not. So many traders, it seems, want to find that Easybutton were someone else does the work, but they keep the profits and can tell friends how much money they are taking "out of the market". These people tend to move from one expensive system to the next, from one newsletter to the next and one course to the next, always convinced that EasyMoney is just around the corner and that knowledge, experience and hard work in the stock market can be purchased for $5000, or $1000 or $500 or 3 easy installments of $19.95. Well, this weekend the easybutton didn't work for me, and even though its a nice fantasy to have, there is no easy button, either in life or the stock market. You simply have to put in the time to get the desired result.

Volume was much higher across the board on Friday with quadruple witching. The major indexes continued to have resistance in the area of the 50 day moving average on Friday as concerns about the rally build.
The amount of time that the indexes have spent under the moving average without being able to break higher is for me starting to be cause for concern. I have closed my long trade in the QQQQ and have now started to focus more on relative weakness setups instead of buying opportunities.

They were not very hard to find this weekend with a number of stocks showing poor strength over the last few weeks as the market rallied. Tip: Stocks that do not rally with the major indexes during a rally are often the names that see the largest declines when the market turns negative.

Names showing relative weakness include AAPL, MSFT, BA, BAC, IP, BNI and many others. On the upside about the only setup I found remotely interesting was in TSYS.

You use my trademark thread title... Still waiting for my check in the mail.

I always enjoy your thread. Lot of "basic" stuff which newbies just can't seem to get... I still can't understand why people don't actually "read" and "think" to understand what's really important for trading well.

I still can't understand why people don't actually "read" and "think" to understand what's really important for trading well.

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Because asking the typical American to either read or think is like asking water not to flow. To not flow would be against waters nature, just as the act of reading and thinking seems to be against the basic nature of the modern American.

Often it's small things that can have large effects on our bottom line. Here is an example which uses a trade I'm currently in. I shorted AAPL earlier this morning and stopped out, later it gave another entry and so I am now short AAPL again, this time from $86.80. My risk is $1.25 on this trade, and I see a strong area of support at $85 per share and then again around $80.00 per share. This type of setup has about a 50% chance (slightly less) of being profitable, but given the very favorable reward potential versus the risk potential this is a trade I would take all day long. My plan will be to take 25% of the gain off the table when/if AAPL reaches $85 per share, at that point I will adjust my stop out point to breakeven or better. The balance of the trade I will be taking off if it hits $80.00 per share. Lets look at how taking off some shares at $85 effects my outcome. I'm going to take 25% off if it hits that point. Assuming that the trade works out and goes to $80.00 I will make an average profit of $5.55 per share, or about 4 1/4 times more then my initial risk. Let's assume though that instead of taking off 25% at $85 my plan is to take 50% off. At that point making all of the same assumptions my average gain on the trade is reduced to $4.25 at closing, or about 3 1/4 times my initial risk. Still not bad, but not nearly as good.
The point of this post is not a discussion of "partialing", which is a subject half a book could be written about. It's not to suggest that you should take 1/2, 1/4, 1/3 or none off at these partialing areas, but simply to make you aware of the very real effect on your bottom line the choice you make has. Too many people do this randomly and decide in the heat of the moment how much to take off, this should not be done. Know in advance what your going to do.

Often it's small things that can have large effects on our bottom line. Here is an example which uses a trade I'm currently in. I shorted AAPL earlier this morning and stopped out, later it gave another entry and so I am now short AAPL again, this time from $86.80. My risk is $1.25 on this trade, and I see a strong area of support at $85 per share and then again around $80.00 per share. This type of setup has about a 50% chance (slightly less) of being profitable, but given the very favorable reward potential versus the risk potential this is a trade I would take all day long. My plan will be to take 25% of the gain off the table when/if AAPL reaches $85 per share, at that point I will adjust my stop out point to breakeven or better. The balance of the trade I will be taking off if it hits $80.00 per share. Lets look at how taking off some shares at $85 effects my outcome. I'm going to take 25% off if it hits that point. Assuming that the trade works out and goes to $80.00 I will make an average profit of $5.55 per share, or about 4 1/4 times more then my initial risk. Let's assume though that instead of taking off 25% at $85 my plan is to take 50% off. At that point making all of the same assumptions my average gain on the trade is reduced to $4.25 at closing, or about 3 1/4 times my initial risk. Still not bad, but not nearly as good.
The point of this post is not a discussion of "partialing", which is a subject half a book could be written about. It's not to suggest that you should take 1/2, 1/4, 1/3 or none off at these partialing areas, but simply to make you aware of the very real effect on your bottom line the choice you make has. Too many people do this randomly and decide in the heat of the moment how much to take off, this should not be done. Know in advance what your going to do.

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HRRRMMMM....

The example you gave is a tough call... What I'm thinking is end up in being ironic if you take snippets of it but...

1. The rational process you provided is largely based on experience. It's actually a direct dilemma for discretionary traders who try to develop models. What seems to extremely rational, becomes very irrational when it comes to clarifying to a code or even teaching newbs... A direct example would be:

- I see a strong area of support"

Strong under what basis?

- but given the very favorable reward potential versus the risk potential this is a trade I would take all day long

What is the basis of the timeframe mentioned?

2. On the contrary, he's mentioned a clear thought process of having a plan of what he will be doing before making the trade. I'll take profits here... Keep it for how long... Exit at this point... The basis or the "trade" is clear cut simple.

... Of course, if I read the lines literally... there are flaws to it. Flaws meaning, points left out that can cause the traders to re-evaluate the trade basis leading to doing something different than intended... (which most people would call lack of discipline... even though it's not). What kind of decision would you make when the market suddenly crashes, when the trade is under an outlyer move? Do you take the profit... keep it? Obviously, newbs would be required to re-assess their trades and due to the short time frame, they may just decide on something stupid like start going off the initial plan.

(I'm being a bit stingy... I know... if I started writing all the things that go inside a trade before it happens... it won't end in a paragraph... but hopefully you get the point. Newbs oftenly don't plan their trades well enough. Last thing you want is to just compromise and conclude that the things between the lines are just plain ol' psychology...)

Often it's small things that can have large effects on our bottom line. Here is an example which uses a trade I'm currently in. I shorted AAPL earlier this morning and stopped out, later it gave another entry and so I am now short AAPL again, this time from $86.80. My risk is $1.25 on this trade, and I see a strong area of support at $85 per share and then again around $80.00 per share. This type of setup has about a 50% chance (slightly less) of being profitable, but given the very favorable reward potential versus the risk potential this is a trade I would take all day long. My plan will be to take 25% of the gain off the table when/if AAPL reaches $85 per share, at that point I will adjust my stop out point to breakeven or better. The balance of the trade I will be taking off if it hits $80.00 per share. Lets look at how taking off some shares at $85 effects my outcome. I'm going to take 25% off if it hits that point. Assuming that the trade works out and goes to $80.00 I will make an average profit of $5.55 per share, or about 4 1/4 times more then my initial risk. Let's assume though that instead of taking off 25% at $85 my plan is to take 50% off. At that point making all of the same assumptions my average gain on the trade is reduced to $4.25 at closing, or about 3 1/4 times my initial risk. Still not bad, but not nearly as good.
The point of this post is not a discussion of "partialing", which is a subject half a book could be written about. It's not to suggest that you should take 1/2, 1/4, 1/3 or none off at these partialing areas, but simply to make you aware of the very real effect on your bottom line the choice you make has. Too many people do this randomly and decide in the heat of the moment how much to take off, this should not be done. Know in advance what your going to do.

More...

If the stock is at $80.50 next week, would you take some off or still be short a full position?

AAPL continues to look very nice as a short, and I am considering adding to the position should it break below $84.50 per share. The stock continues to show relative weakness versus the overall market as there have been a lot of concerns about Steve Jobs. This is obviously something to keep an eye on as any news on Jobs is likely to have a huge impact on the stock. Over the last couple of days the volatility has just totally come out of this stock. Volatility always reverts to it's mean..simply what this means for us is that periods of very low volatility will be often followed by periods of high volatility, periods of very high volatility likewise will often be followed by periods of low volatility as the market works back to it's averages. This volatility cycle can be very profitable if you understand it, sadly most traders don't and they end up running around like my cat Nina when she's chasing her tail. In the end your tired and dizzy, but you did not get what you wanted.

In any event keep a close eye on AAPL. I currently have a small short position on that was opened last week, this will be an add on to that trade.